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Home , Barents Region, Baydaratskaya Bay, Kola Peninsula, Kolguyev Island, Murman Coast, Pechora (river)

—..- -, w l-” = 1- MASTER u) z Petroleum Development in Russian Barents :

Driving Forces and Constraints

By Arild Moe and Anne-Kristin Jm-gensen L o ‘-3 Ili Oc IL

FNI Report 7/2000

@ DISCLAIMER

Portions of this document may be illegible in electronic image products. Images are produced from the best available original document. FRIDTJOF NANSENS INSTITUTT THE FRIDTJOF NANSEN INSTITUTE

Tittel/Title Sider/Pages Petroleum Development in Russian : Driving Forces 62 and Constraints

Publikasjonstype/Publication Type Nummer/Number FNI Report (also published in Post-Soviet Geography and 7/2000 Economics, 2, 2000)

Forfatter(e)/Author(s) ISBN Moe, Arild and Anne-Kristin Jmgensen 82-7613-394-0

Program/Programme ISSN 0801-2431 Prosjekt/Project 0047 Sammendrag/Abstract The potential of the Barents Sea for petroleum production has attracted interest for many years. In the Russian sector of this , enormous gas finds and substantial oil resources have now been proven, and the first real licensing for field development in the area has just begun. Despite the area’s potential, there are strong conflicts of interest. The report examines the forces alterna- tively driving and hindering offshore hydrocarbon development in the Russian sector of the Barents Sea. It describes exploration activities beginning during the Soviet period and extending to the present. The status of the major development projects financed in part with foreign capital, and conflicting regional and central government interests involved in such development, is described and evaluated. Coverage includes a discussion of the various regional interests in petroleum activities, with a particular focus on the conversion of naval yards in the area and the emergence of Rosshelf, an oil/gas conglomerate formed to facilitate such conversion. It also reviews the planned licensing rounds and the results of the first round. Finally, it discusses supplies from the Barents Sea in the context of overall Russian energy supply and energy development strategies.

Stikkord/Key Words Russi~ offshore, oil, gas, Barents Sea

Bestilling til/Orders to: Fridtjof Mmsen Institute, Postboks 326, N-1326 Lysaker, . Tel: (47) 67111900 Fax: (47) 67111910 Email: [email protected] Table of contents

INTRODUCTION ...... 3 Ewly Development ...... 3

THE RESOURCE POTENTIAL OF THE RUSSIAN BARENTS SEA ...... 5 Surveying and Exploration after 1991...... 5 Present Drilling Activi~ ...... 10

STATUS OF DEVELOPMENT PROJECTS ...... 12 Prirazlomnoye Field ...... 13 Shtokmanovskoye Field ...... 14

REGIONAL INTERESTS ...... 16 General Situation in and Arkhangel’sk Oblasts and the Nenets ...... 17 Regional Complexes Supporting Offshore Development ...... 20 Industrial Spin-off Effects from Shelf Development ...... 23 Energy Supplies to the ...... 25 “Regional” Oil and Gas Resomces ...... 26

NAVAL SHIPYARDS — ASSET OR CONSTRAINT? ...... 27 General ...... 28 Conversion ...... 30 “The Shelf Will Feed Eve~body...'' ...... 32 The Establishment of Rosshelf ...... 33

Legal framework ...... 38 Licensing in the Barents Sea ...... 4O Results of the First Tender ...... 43 Outlook ...... 44

OVERALL DEWD PICTURE ...... 44

OTHER CONSIDERATIONS ...... 50

CONCLUSIONS ...... 52

REFERENCES ...... 57

Frid~of Nansen Znstitute INTRODUCTION

The potential of the Barents Sea for petroleum production has attracted interest for many years. In the Russian sector of this ocean, enormous gas finds and substantial oil resources have now been proven, and the first real licensing for field development in the area has just begun. Despite the area’s potential, there are strong conflicts of interest. The main “contestants” are the authorities of the adjacent coastal regions, large Russian energy companies, and the military. At the same time, prospects for development also are affected by the unsettled balance of power between the federal center and the regions. In this paper, we describe the resource potential and current status of petroleum exploration and development activities on the Russian continental shelf in the Barents and and then proceed to analyze regional interests and the role of shipyards in the area. The licensing round carried out in 1999 is described alongside plans for further rounds. In conclusion, we examine the role of the in the overall Russian energy supply picture.

Early Development

The initiated seismic surveys in the Barents Sea in the early 1970s, spurred by theories of Soviet geologists who maintained that the area contained significant petroleum resources. After 1978 extensive surveys, concentrated mainly in the area between and the Peninsula, were performed. In total, the seismic surveys covered a huge area, and several structures were identified. However, at the time Western specialists raised doubts concerning the Soviet capacity to analyze the collected data. Prior to the mid-1980s, no co-operation existed with foreign companies with respect to data gathering or analysis; however, considerable amounts of equipment were imported for use in the Barents Sea.

Exploration drilling began in 1981 in the southeastern portion of the Barents Se%which also is referred to as the . The drilling took place on the Dresvyanskaya structure at the mouth of the Pechora River, fi-omthe platform Sevastopol’, based on a converted Liberty ship anchored in the shallow waters. This represented a quite primitive

Fridtjof Nansen Institute 3 technological solution that could not be applied in deeper waters. In order to carry out operations in deeper waters, imported technology was needed. Special attention was devoted to the purchase of three drillships fi-omFinland in 1979. Two of them, l’alentin Shashinand ViktorMuravlenko, delivered in 1981 and 1982, came to play a key role in subsequent exploration. These ships were designed for drilling down to 6000 m in water depths of 300 m. They were equipped with dynamic positioning systems from Norway’s Kongsberg Vi?ipenfabrikkand were considered the most advanced ships for arctic offshore drilling at the time.2 In addition to the two drillships, three semi- submersible rigs— Shelf5,6, and 7, built in Vyborg— and two jack-ups— KoMaya and Murnzanskaya,built by Rauma-Reppola in — were employed. Thus by the beginning of the 1990s altogether seven drilling rigs were operating in the Russian sector of the Barents Sea (Moe, 1994).

These rigs had carried out drilling on a total of 21 structures by 1991; 41 wells were drilled, of which 26 were completed. This is a small number compared to the number of drilling units, even if one takes into account the short work season and the inexperience of the crews. The discovery rate was quite good, however, and nine interesting fields were discovered, including the giant Shtokmanovskoye gas and condensate field (1988) in the northwestern part of the Russian Barents Sea and one significant (l%irazlonmoye, 1989) and several small oil fields in the Pechora Sea.

Thus, by the end of the Soviet period it appeared as if the stage was set for major petroleum activities in the Russian Barents Sea. A significant resource potential had been identified, the competence and equipment of Soviet organizations working in the field had reached a reasonable level, and an emerging openness toward international co- operation seemed to guarantee that any remaining obstacles could be overcome by the parties involved. In the next section, this paper returns to the Russian Barents Sea during this critical period for the purpose of explaining why developments took another path and at the same time evaluating the prospects for increased activity within the new political and economic fi-amework.

2 For more details on the period before 1987, see Bergesen et al. (1987).

Fndtjof Nansen Institute 4 THE RESOURCE POTENTIAL OF THE RUSSIAN BARENTS SEA

Surveyingand Explor&”onafter 1991

Seismic surveying as well as exploration drilling was curtailed from the early 1990s because of fimding problems as well as reorganization of the oil and gas sector (see below). Thus the amount of drilling dropped fi-oma top level of roughly 19,000 m in 1988 to 2,000 m in 1996. Seismic surveying dropped concomitantly. This decline in activity is reflected in annual additions to resources since 1990, which have been less than in the years of peak activity, but nevertheless substantial.

As of 1997, roughly 322,000 km of two-dimensional seismic profiles had been shot in the Barents and Pechora seas. Three-dimensional seismic profiles were shot for the first time on the Russian shelf in 1996–1997, altogether some 500 kmz. The density of the seismic profiles that have been shot is very low, 0.3 km per krn3 for the entire area (Malovitskiy et al., 1998, p. 8). Altogether 93 interesting geological structures have been discovered.’ Of these 39 are in the Barents Sea and 54 in the Pechora Sea. Detailed work has been carried out on 27 structures (9 in the Barents Sea and 18 in the Pechora Sea) (ibid., p. 10).

In the structures where detailed seismic exploration has been conducted, estimated

resources (C3) are set at 4,500 million tons of oil equivalent (ibid.). Russian expectations are that the reserve numbers can be increased considerably with more exploration. The geological organizations active in the area expect thereto be a total 24 billion tons oil equivalent of exploitable hydrocarbons in the Russian sector of the Barents and Pechora seas. Of this 3.4 billion tons are forecast in the Pechora Sea and 20.6 billion tons in the rest of the Barents Sea. In the Pechora Sea, the expected share of oil and condensate of total hydrocarbon resources is 45 per cent, and in the rest of the

3As of 1991, the corresponding number was 60 to 70.

Fridtjof Nansen Institute 5 Barents Sea only 6.1 percent. Thus the Pechora Sea is considered to be promising for both oil and gas, whereas the Barents Sea is considered to be mainly gas bearing.

Figure 1. Interesting fields and structures in Russian Barents and Kara Seas

...... >...... :.:.. :.fi.:...... : .,,.:.:.:::::: 1 Ludlovskove 7 Prirazlomnove 13 Mezhdushmskaya 19 Varandev-More 2S Ferarnanovskaya 2Shtokmanovskove 8 Ruaanovskove 14 Pa aninakaya 20 Yuzh.-Dolginakaya 26 Kurchatovskaya 3Severo-Kildinskove 9 Lenimzradskove 15 Ko ‘ska a 21 Ledovoye 27 Luninakaya 4 Murmanskove 10 AdmiraIteiskaya 16 Koloko‘k orakaya 22 Alekseevskaya 28 R bachinskaya 5 Pomorakove 11 Tulomskaya 17 Sev.-Dol inakaya 23 Russkaya 29 +’sentralnaya 6 %v.-G tdv~evskove 12 Akh.-Andreyevskaya 18 Medynsf we 24 Arkticheskaya 30 Varyazhskaya FridfjofNansetlInstitute 2000 31 Zap. -Sharap0vskaya

Underlined names represent jekis with exploitable reserves (according to Russian deftition), others are promising structures

FridQofNansen Institute 6 Altogether over the 15-year period 1981-1996, 127.2 thousand m were drilled, 90.6 thousand in the Barents Sea and 36.6 thousand in the Pechora Sea, fi-om43 holes. Of these 33 were completed, although only 7 of these since 1991.4

At present 16 oil- and gas-bearing or potential oil- and gas-bearing areas have been identified in the Russian Barents and Pechora seas (Malovitskiy et al., 1998, p. 10) (Fig. 1). The dividing line between the concepts “interesting structure” and “field” is not totally clear, and thus the numbers may vary, but it is reported that 10 fields had been discovered as of 1998, 5 in the Barents and 5 in the Pechora Sea. The Pechora Sea contains three oil fields (l%irazlomnoye, Varandey-More [Severo-Varandeyskoye], and Medynskoye-More) ;one oil and condensate field (Severo-Gulyayevskoye); and one gas and condensate field (l?omorskoye). The Barents Sea contains three gas fields (Murrnanskoye, Severo-Kildinskoye, and Ludlovskoye) and two gas and condensate fields (Shtokmanovskoye and Ledovoye) (Fig. 1). Three of the discoveries were made after 1991— Ledovoye, Varandey-More, and Medynskoye-More. A listing of fields as well as structures of potential interest in the Barents/Pechora Sea region is presented in Table 1.

The Pechora Sea shelf is an extension of the onshore Timan-Pechora petroleum province. The latter is fairly well mapped. Extrapolating results from onshore exploration to the shelf, it is believed that the Pechora shelf may contain a vast number of oil fields. However, the average size will be very small, with less than 30 fields expected to contain more than 10 mt.5 The most recent Russian estimate of total exploitable oil reserves in the Pechora Sea suggests reserves of 400 ret,’. This resource base could support an annual production level of 15 to 20 million tons (ret), representing a quite significant oil-

4In comparison, by January 1, 1999,939 exploration wells had been drilled on the continental shelf of Norway (Ministry, 1999).

5 This assessment is based on Belonin and Podolski (1995), as quoted in Bjmkvoll and Sandvik (1997, p. 42). b This figure was stated by B. Nikitin, a official, during a discussion in the Presidium of the Russian Academy of Sciences in 1997 (quotedin VestnikRossiyskoy Akirdemii Nauk, Vol. 67, No. 10, 1997, p. 906). This is more than earlier assessments. Gqrom expects that 1.1 billion tons of exploitable oil reserves already exist for the Barents Sea as a whole (including the Pechora Sea), and that the potential is much larger (see Russian Petroleum Investor, May 1998 and Zorin, 1997).

Fridtjof Nansen Institute 7 producing region compared to, for example, the . Almost all the hydrocarbons in the Pechora Sea are found in structures in shallow waters, at depths of less than 50 m, and most at depths of less than 20 m. (Nikitin, 1999).

The largest field identified in the Pechora Sea is Prirazlomnoye, located 57 km offshore. Drilling on the structure started in 1989 (Nikitin et al., 1999a, p. 8); it is now believed to contain as much as 100 mt of recoverable oil, sufficient to support an output of 7.5 mt annually (ibid.). The two other oil fields discovered in the Pechora Sea — Varandey- More and Medynskoye More — are close to shore, 20 and 23 km, respectively. Preliminary estimates put recoverable reserves (category Cl-3) at 20.5 and 85.9 million tons in the respective fields (Resolution, 1999, p. 5-6.).

Gas also is expected in many small offshore fields in the Pechora Sea, but again the average quantities will be small, some 1.5 BCM. Less than 25 fields are expected to contain more than 10 BCM (Bjarkvoll and Sandvik, 1997), meaning that from a commercial point of view exploitation of natural gas from this area of the shelf is unlikely to be commercially viable.

Proven reserves of gas in the Barents and Kara Seas are approximately 6.6 trillion cubic meters (TCM). Annual production fi-omthe Shtokmanovskoye field alone could amount to 50-100 billion cubic meters (BCM). Afier the discovery of Shtokmanovskoye, two other giants, Ledovoye and Ludlovskoye, were identified in the same part of the Barents Sea. With regard to natural gas, it is not the total volume that is most interesting about the Barents Sea deposits, but rather the fact that substantial volumes are concentrated in very large fields. In addition to the Barents Sea giants, two super giants, Leningradskoye and Rusanovskoye, have been discovered in the .

Fridtjof Nansen Institute Table 1. Offshore Fields and Important Offshore Structures, Russian Barents Sea

Field or structure (Expected) content Reserves Status I Admiralteyskaya Exploration license 1993–1997 held by I

I Akhmatovskaya Exploration license 1993–97 held by ~ Akhrnatovsko- Gas and condensate 134 BCM probable Tender expected 2000-2001 (2) Andreyevskaya Alekseyevskaya Exploration license 1995–2000 held by Ploschad Gazprom (6) Andreyevskaya Exploration license 1993–1997 held by AMNGR (6) Arkticheskaya Fersmanovskaya Exploration license 1993–1997 held by AMNGR (6) Kolokolmorskaya Gas Smaller than Exploration license held by Pechormomeft; Pomorskoye open tender announced Feb. 1999 (1O) Kolskaya Kurchatovskaya Ledovoye Gas and condensate (9) 4–500 BCM (2) Tender expected year 2000 (2) Leningradskoye Gas and condensate (1) 4,100-7,300 BCM Exploration license 1993-1997 held by expected (8) AMNGR (6) Ludlovskoye Gas (9) 1,400 BCM Exploration license 1993–1997 held by ex~ected (7) AMNGR (6) Luninskaya Exploration license 1993–1997 held by AMNGR (6) Medynskoye-More Oil (9) 85.9 (Cl-3) (10) Exploration license 1993-1997 held by AMNGR Co-operation Gazprom-Statoil (11) Closed tender (only Russian companies) announced Feb. ’99 (10) Mezhuzharskaya Oil 50-60 mt Tender expected 2003–2004 (2) preliminary 120 BCM probable Exploration license 1993–1997 held by (9) 50-60 BCM Tender expected 2001–2002 (2) probable ~ Polyamaya Exploration license 1993–1997 held by I

I1 A~GR (6) Pomorskoye Gas and condensate (9) 22 BCM of gas Exploration license held by Pechonnomeft; (C1+C2) op& tender announced Feb. 1999 (10) Prirazlomnoye oil (9) 100 mt (3) Development by Gazprom and Rosshelf, in cooperation with Wintershall (5); development and production license 1993- 2018 held by Rosshelf (6) Rusanovskoye Gas and condensate (1) 3,300 BCM Exploration license 1993–97 held by { expected (8) AtiGR (6) Russkaya Oil and condensate 31 mt probable Tender expected at the end of 2000 (2) Rybachinskaya Severo-Dolginskaya Co-operation between Gazprom-Norsk Hydro-Statoil(11) Severo-Gulyayevskoye Oil and condensate (9) Severo-Kildinskoye Gas (9) 135 BCM expected (7)

Fridtjof Nansen Institute 9 Shtokmanovskoye Gas and condensate (9) 3,200BCM gas Exploration and development license 1993– (4); 22 mt. 2018 held by Rosshelf (6) condensate Tsentral’naya Tulomskaya Gas and condensate 390 BCM probable Tender expected 2001–2002 (2) Varandey-More Oil (9) 20.5 (Cl-3) (10) Exploration license 1995–2000 held by (Severo-Varandeyskoye) Gazprom (6); cooperation with Gazprom- Statoil (11); closed tender (only Russian companies) announced Feb. 1999 (10) Varyazhskaya Yuzhno-Dolginskaya Exploration license 1995–2005 held by Gazprom (6) Zapadno-Sharapovskaya Exploration license 1993–1998 held by AMNGR (6)

Sources (numbers in parentheses): 1 = Ostistiy et al., 1999; 2 = Garipov, 1998; 3 = Upward, 1998; 4 = statement by B. Nikitin, Gazprom, during a discussion in the Presidium of the Russian Academy of Sciences, 1997, quoted in VestnikRossiyskoy Akademii iVauk,Vol. 67, No. 10, 1997, p. 906; 5 = FTInternational Gas Report, April 2, 1999, p. 6; 6 = Perechen’, 1995; 7 = Belonin and Podolski, 1995, as quoted in Bjmkvoll and Sandvilq 1997, p. 42; 8 = Bjmlcvoll and Sandvik, 1997,p.51; 9 = Malovitskiy et al., 1998, pp. 8-12; 10= Ekonomicheskie ipravovye voprosy nedropolzovaniya v Rossii, 3, February 9, 1999, pp. 5-6; 11 = Statoil -Ukestatus, May 28, 1998.

Present Drilling Activity

The reduced level of exploration activity since the early 1990s is a sign of the current economic crisis in and the inability to generate investment for long-term projects, but it can also partly be regarded as an adjustment to a more normal situation where surveying, exploration, and field development are more in balance. It can be argued that during the Soviet period, the level of seismic surveying in the Barents Sea, and in other parts of the USSR, was “exaggerated” in relation to production capabilities. According to this view, the main task now is not to identifi new structures, but to develop the more promising ones of the many that already have been identified. This is also a major reason behind Gazprom’s Program, elaborated in 1995, which emphasizes drilling in promising structures for the period to 2010 (Nikitin and Rovnin, 1996). The program since has been integrated into government plans.

Against this backdrop, one would expect substantial efforts to drill test wells in the most promising structures. However, the drilling in identified structures is proceeding quite

Fridtjof Nansen Institute 10 slowly. As of 1998 drilling had only occurred at 6 of the 16 oil- and gas-bearing or potential oil- and gas-beting structures that had been identified. The responsible entity, the Murmansk drilling organization Arktikrnomefiegazrazvedka (AMNGR), drilled 5 or 6 wells every summer in the Barents Sea during its “best” years at the end of the 1980s, but the number more recently has been between Oand 2. The organization received 14 licenses in 1993 for geological exploration valid until 1997 (Perechen’, 1995), but it did not manage to fulfill the drilling program. Gazprom received three licenses for geological exploration in 1995 that extend to 2000 for the Yuzhno-Dolginskaya, Alekseyevskay~ and Varandey-More fields (ibid.), and the Norwegian state oil company Statoil also has been participating in the drilling at Varandey-More. A similar agreement also has been concluded for Medinskaya More, which was transferred to Gazprom fi-om AMNGR. Gazprom has been co-operating with both Statoil and Norsk Hydro on another block — Severo-Dolginskaya. These three companies signed an “intention agreement” in May 1998 on joint exploration and development of blocks in the Pechora Sea (Statoil-

Vkestatus,No. 20, 1998).7 The Russian-Finnish joint-stock company Pechormomeft (see below) also acquired two exploration licenses for Kolokolomorskoye and Pomorskoye in the Pechora Sea and shot seismic profiles therein 1997–1998.

No drilling has yet been carried out in an offshore area that is disputed between Russia and Norway.* But analyses based on seismic surveying conducted prior to 1982, when a moratorium on seismic surveys was imposed, indicate that there maybe commercially viable reserves in the area. In 1999, the Russian Ministry of Natural Resources ordered Russian seismic companies to submit reinterpreted data on the disputed area (Belykh, 2000, p. l).’ The prevalent attitude among specialists in the Murmansk geological

7However, in the fall of 1999 it became known that Statoil had decided to scale down its upstream engagements in Russia and for the time being discontinue the cooperation with Gazprom in the Pechora Sea (Alexander’s Gas Oil Connections, Vol. 4, No. 2, Thursday, December 9, 1999; http:llgasandoil.comfgoc/company/cnr95037.htm). *Norway has been negotiating since 1974 with the Soviet Union, and later Russia, over a delimitation line for the continental shelf and economic zones in the Barents Sea. Norway holds that the boundary should be drawn according to the median-line principle in international law, whereas Russia maintains that a sector- line principle should be applied. These two claims leave a sizeable disputed area between the two countries (some 155,000 km’), much larger than the Norwegian shelf in the (see Moe, 1994, p. 133). 9The Murmansk Arctic Geophysical Expedition also carried out some work on the fringes of the disputed area about 10 years ago.

FridQof Nansen Institute 11 organizations seems to be that prospects are favorable for finding exploitable resources there and from time to time rumors surface about the location of large oil fields in this area.’” However, there is little understanding of the Norwegian negotiating position— that co-operation in exploration and production can only be established once a firm delimitation line has been drawn.”

Even if only the most moderate estimates are considered, it is clear that the Barents, Pechora, and Kara seas are substantial petroleum provinces. However, this is not sufficient grounds for concluding that substantial development projects are justified or will be initiated. Other driving forces and constraints to development must be considered before much can be said about the probability or timing of development.

STATUS OF DEVELOPMENT PROJECTS

The fragmented information available in industry journals and newspapers, Russian as well as foreign, tend to exaggerate the level of petroleum-related activity in the Russian Barents Sea. Wishful thinking is mistaken for firm plans, and plans are confused with actual development. Sometimes the discrepancy is simply the result of misinterpretation of Russian statements; at other times commercially interested parties deliberately distort realities to improve the perception of their own activities or to better their strategic position. Such problems are not unique to Russia, but the relatively small number of independent sources of information makes the problem more serious. And in the analyses in the Western media there may still be a tendency to think in terms of central plans and authority when it comes to Russia. Especially information coming from government agencies is invested with more authority than is warranted in today’s Russia. The discussion below is an attempt to provide a realistic picture of ongoing hydrocarbon development offshore in the Barents Sea, but the caveats above also are relevant for

10Arecent example of such speculation presented as fact can be found in an article by a Lukoil publication (Razrabotka, 1999). The article also advocates the use of decommissioned platforms from the North Sea in this area. 11 In Russian material the disputed area is often referred to as a “zone of joint economic interests between Russia and Norway” (e.g., Gazovayapromyshlennost, No. 7, 1999, p. 7).

Fnd~of Nansen Institute 12 individual pieces of information quoted here.

Prirazlomnoye Field

There is no oil or gas production taking place offshore as of today, with the exception of a very limited production in the beach zone on . Production at this site has been going on since 1987 and some 22,000 tons of oil were produced in 1998. However, the most imminent “real” offshore project is clearly the Prirazlomnoye field in the Pechora Sea. Nevertheless, it is highly uncertain when the field will actually start producing. This field was one of the two exploration and production licenses granted to Rosshelf (see Table 1 and below) in early 1993.]2 The idea at the time was that the field could be developed within a few years and provide a cash flow that could help finance the development of the other license, the super giant Shtokmanovskoye field.

However, development has proceeded quite slowly. A feasibility study for the project was concluded and accepted in 1996 and construction of a platform designed by Brown & Root started at the huge Sevmashpredpriyatiye shipyard in , outside . But it has proven difficult to attract sufficient financial resources to the project. Initially, Gazprom and the Australian oil company BHI? planned to cover 15 percent of the costs each, with the International Finance Corporation (under the World Bank) providing 40 percent; the remaining 30 per cent was to be covered by commercial loans from Russian and foreign banks. In early 1997, the total investments in developing the field were estimated to be $1.5 billion (Russian Petroleum Investor, February 1997, p. 52).’3But BHP announced in the autumn of 1997 that it wanted to reduce its share in the Prirazlomnoye project (RussianPetroleum Investor, October 1997) and abandoned active participation early in 1999, assuming a “non-working” interest in the project. This action reflected a negative assessment of the commercial prospects for the project

12Rosshelf – ‘The Russian company for development of the continental shelf’ founded in 1992 by a number of naval shipyards and defense-industry design bureaus seeking to accelerate their transition to a market economy by shiffig output to equipment for offshore oil production (see the section on naval shipyards). 13 According to Gazpro~ the price of the platform alone is expected to be 800 mill. USD (Gazprom Company, 1999).

Frid~of Ntmsen Institute 13 (Business Wire, News Alert, January 29, 1999. According to Rosshelf, the protracted, passive position of the Australian company has complicated the search for a financial solution (Slukhi, 1999).

A German company, Wintershall AG (a subsidiary of BASF) has become a new partner in the project (BASF/Gazprom, 1999). The exact scope of its participation is still unclear, but it seems to be primarily of a financial nature. It maybe natural to see the participation in the context of the extensive collaboration between Gazprom and Wintershall in the European gas market.” Independent assessments of the platfonn- building process are not available, but in the autumn of 1998 Gazprom maintained that it was 19 percent complete (Gazprom, 1998) and could be finished by 2002 (Russia’s Gazprom Outlines, 1998). According to the field development plan, production is planned to reach a level of 6 million tons annually after a few years (Australians, 1997).

The pace of development for this project is highly uncertain, as indicated above, and 2002 is unrealistic. Aside fi-om the financial problems, the Russian partner is in need of technical expertise from an experienced offshore company in order to develop and operate the field, at least initially, and it is doubtful whether Wintershall can perform this role alone. Gazprom reportedly for some time has let it be known that it would like to see Statoil perform this role. (Upstream, April 14, 1997). Other companies also have been approached. Nevertheless, despite the uncertainties, it is likely that Prirazlomnoye will become the first active offshore project in the area of the Barents and Kara seas.

Shtokmanovskoye Field

The Shtokmanovskoye gas and condensate field, located 650 km northeast of Murmansk, was discovered in 1988. It is one of the largest offshore gas fields in the world, with

*4Wintershall and Gazprom formed a joint company in the early 1990s — Wingas — to market Russian gas in Germany and as an alternative to the traditional buyer — Ruhrgas. They also formed other partnerships and Wintershall was singled out as a preferred partner. More recently, the relations with Ruhrgas have been extended to a level that clearly leaves Wintershall in a minor, but still important, role. For more on the Gazprom-Wintershall cooperation, see Estrada et al., 1995, pp. 261-264.

Fridtjof Nansen Institute 14 proven natural gas reserves of 3,200 BCM. This is about twice as much as in the Troll field in the North Sea, which presently is the biggest productive offshore gas field in the

world. Shtokrnanovsko ye also contains condensate, 22 mill. tons’s (VestnikRossiyskoy AkademiiNauk,Vol. 67, No. 10, 1997,p. 906), which enhances its commercial attraction. Six exploration wells have been drilled thus fiw(Nikitin et al., 1999a).

However, the technical difficulties in developing the field are substantial. First is the distance to shore, but great water depths (some 280 to 380 m), drifting ice, and high waves also can pose problems. The productive layers are located between 1,380 and 2,340 m (ibid.). However, conclusions horn technical evaluations of the site are that the field can be developed with existing technology. But Gazprom, which in reality controls the project, would need the participation of foreign companies with offshore experience, both for technical and financial aspects of the project. A group comprising Norsk Hydro, Fortum, Conoco, and TotalFina is currently assisting Gazprom. Their work includes improvement of the geological data, development solutions, and commercial evaluations of the market for gas and condensate from the field.

The company officially maintains that it plans to start building one of several platforms in 2001 and that a production level of 60 BCM can be attained in 2010-2012 (Russia’s

Gazprom Outlines, 1998).16 With the inclusion of the adjacent Ledovoye and Ludlovskoye fields, Gazprom envisages an “offshore gas production center” with an annual production capacity of 90 BCM (Nikitin et al., 1999a). This would be almost twice the volume presently exported from the entire Norwegian continental shelf.

The exact transport route for gas extracted flom the field has not been decided. The plan mostly discussed thus fiarentails a pipeline to , east of Murmansk, with one line extending to the city of Murmansk. But other landing points, notably the terminal (see below) also have been mentioned. Another pipeline would transport gas

15Recent statements from Rosshelf give an even higher number for gas reserves — 4,000 BCM (Gazprom Turns, 1999). 16Gazprom recently has announced that it would like to see production start as early as 2006 (Gazprom Turns, 1999).

Fridtjof Nansen Institute 15 southward via Belomorsk and Petrozavodsk. The gas thus could find its way to European markets via Finland and or directly to Germany through a pipeline under the . Establishment of a plant for liquified natural gas (LNG) plant near Murmansk is being considered. Such a project would be the basis for exports overseas, particularly to the U.S. market.

REGIONAL INTERESTS

According to the Constitution of the Russian Federation, Russian mineral resources are the property of the state. But a major factor is that they are managed jointly by state authorities at the federal level, and regional authorities at the regional level (see Kryukov and Moe, 1998). However, the hydrocarbon resources on the Russian Arctic shelf (i.e., those located beyond 12 nautical miles from the shore) do not belong in the category of joint management, being managed exclusively by the federal authorities. Nevertheless, the adjacent coastal regions, Murmansk and Arkhangelsk oblasts, and the , have an interest in influencing the further development on the shelf in order to maximize regional benefits and protect the local environment. Below we shall attempt to identi~ the real as well as the perceived interests of the two oblasts. The analysis is structured around four key factors that we believe play an important role when regional interests are defined.

Fridtjof Nanseiz Znstitute 16 1. Existing hydrocarbon development capabilities. The regions’ hydrocarbon development capabilities (i.e., those related to oil and gas development) will influence the opportunities of the two oblasts to play an active role in the development process itself. In , these capabilities are linked primarily to a cluster of offshore exploration and seismic companies. No such institutions are present in , although the naval shipyards in Severodvinsk are striving to assume the role of a regional offshore complex.

2. Possible spin-off and multiplier effects fi-omdevelopment. Regardless of their own role in the development process, it is likely that the regions will attempt to maximize industrial spin-off effects. These may be linked to supply bases, landing facilities, refineries, and processing plants, and the two oblasts in question will to some extent have to compete with each other for such bases and facilities.

3. Improved energy supply to the regions. Both Murmansk and Arkhangelsk oblasts have experienced serious problems with oil and gas supplies over recent years, and perceived possibilities of improving this situation seem to play an important role for the regions’ policy in the field of oil and gas development.

4. Prospects for onshore and coastal-zone oil and gas development. Prospects for onshore and coastal-zone oil and gas development may greatly affect the regions’ priorities, since such development would result in the accrual of direct revenues from production to the regions themselves. The situation in each of the two oblasts and the Nenets Okrug is discussed in greater detail below.

General Situa.tz”onin Murmansk and Arkhangel’sk Oblasts and the Nenets Okrug

Murmansk Oblast has around 1 million inhabitants, and nearly 400,000 of them live in the city of Murmansk. Prior to , the number of inhabitants was only a few thousand, but in the early 1920s large-scale in-migration began, linked to the

Fridtjof Nansen Institute 17 development of the fisheries, the mining and metallurgical industry, and the naval bases that were to become the home of the .” Murmansk Oblast became characterized by a typically “Soviet” economic structure, with a high degree of urbanization and a predominance of large heavy-industrial enterprises.

Since the early 1990s, production has fallen sharply both in the fisheries and the mining and metallurgical complex,ls and the latter enterprises – many of which are very large and have a dominant position in the town where they are located – have experienced problems competing under market economic conditions. The military complex has been particularly hard hit as a result of force reductions and reduced military spending, and many former officers have joined the ranks of the unemployed. Although Murmansk Oblast has freed much better than many other regions in the Russian North, the problems dominant in all the traditional branches of the economy have created a great need for alternative economic activity, and oil and gas development is considered one of the most promising possibilities.”

Arkhangel’sk Oblast has around 1.5 million inhabitants. The two largest cities, Arkhangel’sk and Severodvinsk, have populations of 375,000 and 235,000 respectively (Arkhangel’sk, 1999, p. 5). Unlike Murmansk, Arkhangel’sk Oblast has had a sizable population for hundreds of years, and its economic structure is characterized by a blend of “Russian” and “Soviet” features. The region is less urbanised than Murmansk, and because of the milder climate, agriculture plays an important role in the rural areas. As in Murmansk and most other regions of the Russian North, the economy of Arkhangel’sk Oblast is largely based on the export of raw materials and semi-processed goods. The region contains vast timber resources, and wood processing and pulp and paper production are the most important industrial activities. For several decades there has

17 Those who relocated to the from other parts of the Soviet Union were attracted by the special economic privileges rendered to inhabitants of the Far North, and many of them returned to their original place of residence upon retirement. Since the early 1990s, these privileges have become less important, and living costs have soared as state subsidies have dwindled. In the same period, the total population of the oblast has decreased by 130000, according to official statistics (Murmansk 1998, p. 23). 18Total industrial output in 1996 was approximately 65 percent of the level for 1990 (Murmansk, 1998, p. 51). ‘9 Additional background information on Murmansk oblast can be found in Hmmeland and Jorgensen, 1999a.

Fridtjof Nansen Institute 18 been great pressure on the most accessible forest areas, since a poorly developed irdiastructure has prohibited the exploitation of other areas. Consequently, productivity in this sector started dropping as early as 1987 (Castberg, 1994), and in the 1990s, this tendency has become even more acute.

Other significant branches of the economy are transportation the military ship-building and ship-repairing industries, and the fisheries. The former of these sectors has been greatly affected by the overall decrease in economic activity. As in Murmansk, productivity in the fisheries sector has dropped significantly, and the onshore - processing industry has virtually come to a standstill in both oblasts, since most of the fish is currently being exported abroad. State orders to the military industrial complex dropped radically after the breakup of the Soviet Union. Thus, the city of Severodvinsk, which is totally dependent on its naval shipyards, is experiencing deep economic and social problems (see below).

The Nenets Autonomous Okrug is located in the northeastern corner of Arkhangelsk Oblast. The okrug has less than 50,000 inhabitants, and the titular nationality – the Nentsy – constitute a minority in the okrug, where the bulk of the population is Russian.*” The industry and infi-astructureof the okrug were developed only to a very limited degree in the Soviet period. However, part of the oil-rich Timan Pechora basin lies in Nenets Okrug, and exploration and exploitation of hydrocarbon resources has now become the most important economic activity. Most of the Nenets still live a semi-nomadic life, while the oil- and gas sector is dominated by (see Blakkisrud, 1997). In the Soviet period, the okrug was formally subordinated to Arkhangelsk Oblast. In the Russian Federation of today, however, the okrug is a subject of the Federation in its own right, although territorially it remains a part of Arkhangelsk Oblast. This change in status has led to conflict between the okrug and the oblast over the right to the oil- and gas resources located in the Nenets Okrug (see Moe, 1994, pp. 138-140).

20 According to recent population statistics, by January 1, 1998-46,600 people lived in the okrug (Goskornstat Rossii, 1998, p. 100). This was down from -54,000 in 1989, when the most recent census was conducted. At that time the population was composed of 65 percent Russians, 11 percent Nentsy, 9 percent Komi, and 7 percent (Harris, 1993, p. xx).

Fridtjof Nansen Institute 19 As is the case in Russia in general, the public sectors in Murmansk and Arkhangelsk oblasts are under-financed. Federal subsidies have been reduced, and the tax base is weak. Thus, most fimds go toward solving acute problems in the social sector, and little is left for investment in infrastructure. Nevertheless, the two regions score somewhat better than the Russian average on most economic indicators, with Murmansk being the more prosperous of the two. However, in some ways, the economic crisis has affected the population more profoundly in the Russian North than in other parts of the country. First, the opportunity to grow one’s own food —which has made a substantial contribution to meeting many Russians’ nutritional needs and even precluding outright starvation in some cases —is more limited in the North. This applies especially to Murmansk Oblast. Second, and more important in the context of this report, shortages in the supply of energy have major impacts in areas with cold winter temperatures.

Regional Complexes Suppoti”ng Offshore Development

Unlike Arkhangel’sk Oblast, Murmansk Oblast possessed an existing industrial complex capable of supporting offshore hydrocarbon development, reflecting the role of Murmansk as a staging ground for exploration of the Arctic shelf during the Soviet period. It was home to several geological and geophysical organizations possessing both the competence and the equipment necessary to carry out this work. Most of these organizations still exist, and the most important of them are the following:

● AMNGR, or Arktikmomeftegazrazvedka (Arctic Marine Oil- and Gas Exploration Company);

● MAGE (Marine Arctic Geological Expedition);

● Sevmorneftegeofizika (Northern Marine Oil and Geophysics);

● AMIGE (Arctic Marine Engineering and Geological Expedition) —a geological company;

● NIIMorgeofizika (Murmansk Research Institute for Marine Geophysics); and

● Soyuzmorgeo (Scientific Production Association for Offshore Geology and

Fridtjof Nansen Institute 20 Geophysics) — a coordinating body of the Ministry of Fuel and Energy, recently moved to Gelendzhik in Krasnodar Kray. . VNIIokeangeologiya (The scientific research institute for ocean geology) and . Murrnanskiy morskoy biologicheskiy institut (Murmansk institute of ocean biology) are also relevant in this context.

When the exploration activity on the Arctic shelf was at its peak in the late 1980s, Arktikmomeftegazrazvedka (AMNGR) clearly harbored ambitions of securing a leading position in the subsequent development phase, and of transforming itself into an oil company. A&r the activity lost momentum in the early 1990s, several of the exploration organizations in Murmansk Oblast have taken part in cooperative projects with foreign partners, as a survival strategy. In some cases, the ultimate objective has been to compete for production licences on the shelf. MAGE, Sevmomeftegeofizika, and AMNGR (51 percent) formed the company Pechormomeft, together with Finnish Neste and Kv=mer Masa Yards (49 percent), with the objective of participating in offshore activities. The Norwegian Institute for Continental Shelf Research (IKU) has co-operated with NUmorgeofizika, and the Norwegian geophysical company Fugro-Geoteam has a joint venture with MAGE, known as Sevotezun,that has encompassed co-operation in Russian waters as well as abroad.

The organizations constituting the offshore complex still employ thousands of people in aggregate, but as their finding and activity have diminished, so has the number of employees. Some of the organizations have experienced personnel cutbacks of 50 percent or more. MAGE reduced its staff from well over one thousand to 300 (Belykh, 2000, p. 22). AMNGRs physical capabilities also have been sharply reduced. Only one jack-up rig (A4wvnamkaya) is currently in operation in the Barents and Kara Sea area. Three semi-submersible rigs (the She@) have been sold, and one jack-up (Kolskaya) has been leased and operates abroad, as do the organization’s two drilling ships (W&v

Muravlenko and Valentin Shashin) (Murmanskiy Vestnik, January 13, 1999, p. 2). AMNGR is still a fully owned state enterprise, but claims to have received no state finding for the last four years. The organization has survived by leasing out its equipment, and by taking on occasional assignments for Gazprom. AMNGR also is

Fridtjof Nansen Institute 21 involved in the only production of oil currently taking place on the Arctic shelf, near the Kolguyev Island. However, this production is fairly limited, and while it provides some income, is not reported to be particularly favorable from an economic point of view.

For these companies, the key to accelerating developments on the continental shelf is to create greater possibilities for foreign involvement. The companies may try to obtain the right to invite their own investors to take part in fi.u-therexploration. However, there seems to be a prevailing perception within the organizations that time has passed them by. The situation is quite different today than in the early 1990s, since the organizations have shrunk, and since so much of remaining capacity is tied up abroad and thus impossible to mobilize quickly if an opportunity were to arise.

Arkhangel’sk Oblast also has a significant oil and gas sector, but the activity has traditionally been directed toward exploration and development of onshore resources. The bulk of the regional expertise in this field was concentrated in the state-owned geological organization Arkhangelskgeologiya, which has since become an oil exploration company controlled by Lukoil under the name Arkhangelskgeoldobycha. The company currently is engaged in both exploration and exploitation of oil deposits in the Nenets Autonomous Okrug. “However, Arkhangelskgeoldobycha has neither the experience nor the expertise or equipment, necessary for playing a role in the development of offshore resources.

Nevertheless, after the breakup of the Soviet Union, the Arkhangel’sk region began to challenge Murmansk’s status as the “Arctic offshore capital.” This is closely connected with an effort to convert the large military shipyards in the area to offshore-oriented production and is addressed in detail in the next main section of this paper.

Fridtjof Nansen Institute 22 Industrial Spin-off Effects from Shelf Development

From the above, it remains unclear to what extent companies based in the coastal regions will be able to participate directly in the development process as license holders/operators. What is clear, however, is that if large-scale development is going to take place, there will be substantial regional spin-off effects that will give rise to new economic activity. There will be a need for supply and service bases, kmding and reloading facilities, and possibly also refineries and production of equipment.

The geographic location and characteristics of Murmansk Oblast is a great advantage in this respect. Along the northern coast of the Kola Peninsula there are a multitude of fiords and bays that usually are ice free in winter.” The port of Teriberka, some 50 km northeast of Murmansk, seems most promising as a landing point for gas from Shtokmanovskoye and other gas and condensate fields in the Barents Sea. If the gas is to be brought ashore in Teriberka, a 547 km long triple-gas pipeline will be constructed, which will run from the Shtokmanovskoye field to the coast, possibly with extensions to other fields.22A gas pipeline connecting Murmansk and Arkhangel’sk to the Russian pipeline network is currently under construction, although progress on this project has been extremely slow. Reportedly it has reached Kostomuksha in the Karelian Republic. The short-term objective of this pipeline is to improve the gas supply to the regions. However, if the Shtokmanovskoye field is developed, the gas will flow in the opposite direction to markets in the south. The establishment of an LNG facility also has been considered.

Because of the shallowness of the Pechora Sea, development of oil fields in this area will probably require the construction of a reloading port for oil somewhere along the Kola coast. The Gulf of Pechenga, not far from the Norwegian border, is the most likely location for this port. A prefeasibility study was completed in 1996 by AOOT Giprospetsgaz and the Norwegian consultant company Barlindhaug, which envisages the

2*This favorable site characteristic was the rationale behind the establishment of the Northern Fleet, which has six submarine bases in this area. 22Notably Ledovoye, Ludlovskoye, and Fersmanovskaya (Nikitin et al., 1999b, p. 12).

Fridtjof NamsenInstitute 23 construction of a crude oil terminal in the Bay of Liinahamari, which is located in the Gulf of Pechenga, as well as construction of an LNG plant and methanol plant (The Northern, 1996). There has been much attention devoted to these plans in Murmansk Oblast, and the study was commissioned by the regional administration. Gazprom representatives stated in April 1998 that the port should be ready to operate by 2002 (Russia’s Gazprom Plans, 1998), but no activity besides planning has occurred thus far.

If the Shtokrnanovskoye field is developed, the Kola Peninsula will be the natural location for base and service facilities, and the construction of a service base in the , right across from the city of Murmansk, was initiated as early as the late 1980s (Bergesen et al., 1987). There has also been some hope that the service assignments might help revive the naval shipyards in in Murmansk Oblast. However, the work on the service base has been temporarily abandoned. Currently, the question of the location of base facilities for the oil fields in the Pechora Sea is higher on the agenda, since these fields will most likely be developed before any in the western part of the Russian Barents Sea.

For Arkhangelsk Oblast and the Nenets Autonomous Okrug, the most likely spin-off effects from development on the shelf will be linked to development of deposits in the Pechora Sea. These may include landing and reloading points for oil, as well as refineries and supply bases. For several years various proposals for terminals have been discussed, primarily to serve the onshore fields that are likely to come on-stream first, but which also could be integrated with pipelines from offshore fields. Several points along the Nenets coast have been evaluated, although no final solution has been reached. A complicating factor is that powerfil forces want to connect the onshore fields to the Russian oil pipeline network controlled by the oil pipeline monopoly Transneft.

A conflict may arise concerning the location of bases for the development of Prirazlomnoye and other deposits in the Pechora Sea. Both Murmansk and Arkhangelsk oblasts, as well as the Nenets Autonomous Okrug are attempting to promote themselves as suitable base locations. Several factors enter into the equation. Most important, an adequate infrastructure has to be in place, and the distance from fields to base should be

Frid~of Nansen Institute 24 as short as possible. The first of these criteria is sufficiently important to render the chances of Nenets very slim. The okrug has no road or rail connections with the rest of Arkhangel’sk Oblast. Arkhangel’sk and Murmansk are both conceivable as locations for supply bases. However, the distance to Murmansk is shorter, although not by much. An even more important point in Murmansk’s favor is the fact that the freezes in the winter and is only navigable with icebreaker assistance at that time of the year. Thus it seems that Murmansk is the most likely choice.

Energy Supplies to the Regions

Ensuring an adequate supply of energy for the cold season is a recurrent challenge throughout the Russian North. In recent years, there have been serious difficulties in providing sufficient heat, gas, and electricity supplies to consumers in both Murmansk and Arkhangel’ sk oblasts.23Every autumn, the regional newspapers print articles on the situation concerning supplies of mazut (the heavy fuel oil used in many district heating plants) and gas virtually every day. These difficulties affect almost every inhabitant in the area as well as the local industry, and there is a constant pressure on the regional politicians to do something about them.

Traditionally, there has been a supply problem with regard to energy in these areas — not enough energy was available locally — which was compounded by a poorly developed infi-astructure for its transport and distributio~ as well as by technical problems. Today, however, the problem is mainly a financial one: Neither the regions as such nor the individual consumers are able to pay filly for the required energy and energy supplies are halted periodically. However, many regional politicians still seem to think in terms of the planned economy, where buying power was rarely a problem, while the fact that demand generally exceeded supply indeed was. Thus, they seem to regard the frequent

23 In December 1998, for example it was reported that people in Arkhangel’sk preferred to rent an apartment in the old wooden houses of that city rather than in modem blocks of apartments equipped with all the modem conveniences. The reason was that the old houses are equipped with stoves; thus, the inconvenience of having no indoor plumbing was outweighed by the fact that it was possible to stay warm (Nash Sever, December 1998, p. 14).

Fridtjof Nansen Znslitute 25 energy crises first and foremost as a question of insufficient supply of oil and gas. This distortion strongly influences their views on development of “their own” hydrocarbon resources. It is envisaged as vital that the regions gain direct access to such resources, in order to ease the perceived shortages in supply. As a consequence, opportunities for regional control over development, as well as the geographic location of deposits to be developed, are aspects that tend to be overemphasized at the regional level. These questions will be further elaborated in the next section.

“Regional” Oil and Gas Resources

Regional priorities are intricately interconnected with jurisdictional questions involving resources of the shelf. The location of a given oil or gas deposit determines the extent to which regional authorities have a voice in the development process, as well as their share in the resource itself.

According to the Law on the Continental Shelf (enacted in 1995), oil and gas on the Russian shelf is under exclusive federal management. Resources located within the 12 nautical miles from shore, however, fall within the shared jurisdiction of the adjscent subject of the federation and the federal authorities, as do onshore resources. Financially, this joint jurisdiction implies that 60 percent of revenues fi-omresource exploitation are to be assigned to the regional budget, whereas the remaining 40 percent goes into the federal budget. Moreover, if the subject in question is an autonomous okrug, which forms a territorial part of an oblast or kray, the aforementioned 40 percent is to be split between the oblast’/kray budget and the federal one (Zakon, 1992).

Murmansk Oblast has attempted to extend its influence to resources located within 200 miles from the shore. In an appendix to the bilateral agreement between the Russian Federation and Murmansk Oblast on delimitation of authority between fderal organs and those of the oblast (Dogovor, 1997, Art 2), management of resources within the 200-mile economic zone outside extending from the is termed a question of “joint execution” — sovmestnoye vedeniye. It is not quite clear what this term means, but

Fndtjof Nansen Institute 26 according to Murmansk officials at a minimum it means coordination — soglasovaniye (Selin, 1999).

None of the oil and gas fields thus far discovered in the Barents Sea are located within the 12-mile coastal zone of Murmansk Oblast, but some “interesting geological structures” purportedly have been identified along the eastern Kola coast. These are said to be a continuation of the structures in the Timan Pechora province, and some experts believe that the prospects for making new discoveries in this area are quite good. However, no conclusions can be drawn until thorough exploration (including drilling) has been performed.

With respect to Arkhangel’sk Oblast, it can be assumed that the large onshore oil deposits in the Nenets Autonomous Okrug makes development of the resources on the shelf a lesser priority to the regional (Arkhangel’sk) authorities. Admittedly, the fact that Nenets gets the lion’s share of revenues from oil located on its territory maybe considered an argument to the contrary. However, the same situation will apply to offshore deposits within the coastal zone, since these are located in the Pechora Sea, which borders on Nenets. The fact that onshore resources are more accessible and less costly to develop than resources on the shelf is a weighty argument in their favor. Furthermore, there is some indication of oil deposits onshore in an area not fm from the city of Arkhangel’sk. If this is proven to be the case, development of these resources will probably receive the highest priority from the regional authorities.

NAVAL SHIPYARDS – ASSET OR CONSTRAINT?

Many observers, both in Russia and abroad, are highly sceptical regarding the participation of the naval shipyards in offshore development and fear that their involvement will act as a constraint on the development process. The purpose of this section of the paper is to discuss whether this attitude is warranted. Initially, we describe the general features and current situation of naval shipyards located in

Fridtjof Nansen Institute 27 northwestern Russia, before examining how the shipyards in northwestern Russia have

responded to the challenge of conversion, and to what extent they have succeeded in making the switch to production of civilian goods. Finally, attention is focused on the establishment of Rosshelf, and the results obtained thus far regarding construction of offshore equipment at the yards.

General

The naval shipyards in Severodvinsk and on the Kola Peninsula were built up primarily to cater to the needs of the Soviet Navy’s Northern Fleet, established in 1936. As the Northern Fleet expanded throughout the following decades, so did the shipyards. The yards on the Kola Peninsula (unlike at Severodvinsk) have focused mainly on the service and repair of naval vessels. Four of them are large enterprises with several thousand workers each: (1) Sevmorput’, located in Murmansk; (2) Shkval in Polyarnyy; (3) in Roslyakovo, a town administratively subordinated to ; and (4) Nerpa in Snezhnogorsk.24 The former three are owned by the Northern Fleet and hence are directly subordinated to the Ministry of Defense, whereas Nerpa has been subordinated to the Ministry of Economy since 1997.

The shipyards in Severodvinsk are characterized by a broader array of activities and a higher technological level than those on the Kola Peninsula. Production of submarines and other military hardware, as well as modernization and repair of naval vessels are carried out there, mainly at two very large yards: (1) Severnoye Mashinostroitel’noye Predpriyatiye (), which has about 30,000 workers (Sevmash, 1999, p. 64); and (2) Zvyozdochka, which has around 8,000 employees (Kuznetsov and Velikhov, 1997). In 1958, the Soviet Union’s frost nuclear submarine was built at Sevmash, and the enterprise became the most important contractor of nuclear submarines for the Soviet Navy. The core activities at the Zvyozdochka shipyard are repair and modernization

24For more on the shipyards and the communities in which they are located, see Hmmeland and Jmgensen

Fridtjof Nansen Institute 28 of submarines and other naval vessels.

Throughout the 1990s, the economic situation at the naval shipyards has steadily declined. As the activity of the Northern Fleet has been reduced, so has the need for service and repairs, and necessary repairs are often postponed indefinitely because of financial constraints. Thus, in 1997, the shipyards on the Kola Peninsula were reported

to be operating at a level of 10 to 50 percent of full production capacity (Polyarnaya pravda, October 10, 1997, p. 1). Moreover, the Fleet is heavily indebted to the shipyards for work performed but not paid for,zs and the impoverished enterprises are mostly unable to pay the workers their wages on time. As a result, strikes and demonstrations among the workers have occured regularly in recent years, and social conditions in the towns depending on the shipyards are deteriorating (Hmmeland and Jm-gensen, 1999b, pp. 129-135).

Despite their more diversified activities, the Severodvinsk yards were just as dependent on the military complex as were those in Murmansk Oblast, and the consequences of the reduced demand for their products and services have been devastating. As an illustration, the output of submarines in Russia as a whole declined tiom 12 in 1990 to

only 2 in 1996 (Milittwbalansen 1997/98). Thus, activity at Sevmash, an enterprise equipped for carrying out construction of several submarines simultaneously, has plummeted. Wages paid to workers at the Severodvinsk yards — when paid at all — are reported to be far below the subsistence minimum.zc Here, as on the Kola Peninsula, there have been strikes and protests, and the issues reported in the local press demonstrate high social tensions. Considering these circumstances, it stands to reason that the local and regional authorities, as well as the shipyard managers, are eager to maximize the yards’ participation in work related to the development of the

(1998, 1999a) and Rowland (1996) – Ed., PSGE. 25In early July 1998, this debt had amounted to 65 million rubles (at that time approximately $10 million), according to the commander of the , Admiral Vladimir Knroyedov (Poljwrnaya pravda, July 3, 1998, p. 1). 26According to an article in a Severodvinsk newspaper, even a qualified specialist does not receive more than 150 to 200 rubles (less than $10) per month (Severnyy Rabochyy, January 11, 1999, p. 2).

Fridtjof Nansen Institute 29 shelf.

Conversion

Even prior to the dissolution of the Soviet Union, in the late 1980s, diminishing state orders to the naval shipyards in northwestern Russia brought the question of conversion to civilian production onto the agenda. This section of the paper addresses how the yards have approached the conversion issue and describes what has been achieved since the initial steps taken more than a decade ago. First, it should be kept in mind that

total conversion of the yards has never been an option. What has been attempted is diversification, with defense production remaining the core activity. The “need” to keep existing defense capabilities intact has been a precondition for conversion of these yards (Fattakhov, 1995).27 Thus, at least in Severodvinsk, the management has approached the question of conversion with a clear bias towards dual technology and high-tech solutions. As an example, even civilian shipbuilding has been viewed as too simple a task. To quote a Sevmash engineer, this would be like “using ultra-modern computers to drive in nails (Fattakhov, 1995, p. 2). ”

Financial constraints have been a major obstacle to conversion at the shipyards, as at

most other defense enterprises. In an article printed in Novyye Iz,vestiya (August 5, 1998), commenting on the production of offshore equipment in Severodvinsk, it was reported that the Russian state had done very little to help finance conversion for this purpose. Moreover, it was pointed out that the $12 million allegedly invested by Rosshelf/Gazprom comprised merely a fraction of the necessary funding.

The sheer size of the shipyards, both physically and in terms of personnel, has

27Like many defense enterprises in Russia, the Sevmash and Zvezdochka shipyards probably are hoping for defense procurement to increase again. The hopes of these particular two yards maybe justified, since the Severodvinsk yards represent the country’s largest submarine construction and repair facilities. With respect to the yards on the Kola Peninsula, it is conceivable that military repair and service works might be concentrated at some of them with the remainder filly converted at some fiture stage.

Fridtjof Nansen Institute 30 constituted another barrier to effective conversion, particularly seen in conjunction with the wish to retain capabilities. It will be very difficult to offer offshore equipment at market prices if this production is used to subsidise the maintenance of idle space and the salaries of idle workers. However, in addition to the perceived need to protect the “unique technology” of the yards, social considerations may have made managers reluctant to outsource activities that have the potential of becoming profitable. They may not even be allowed to do so by the owner of the enterprises - the Russian state.

Reflecting the aforementioned preconditions and restraints, the partial switch to civilian production that has occurred at the shipyards seems to have transpired in haphazard fashion, in part independently of whether actual conversion has been implemented. Despite the wish to concentrate on high-tech projects, both the Severodvinsk and the Kola yards have embarked on the production of a certain volume of consumer goods and other items that have little or nothing to do with the yards’ core activities. Examples include medical equipment, agricultural machinery, nuts and bolts, and even furniture (Fattakhov, 1995). There is no information available on the precise extent or range of this production. Some of it appears to be small in scale and ad hoc, based on the tools and equipment available at the yards — in fact, a temporary survival strategy. However, some larger projects, requiring considerable investments in new equipment, have also been initiated. For instance, Sevmash is reported to have launched a conversion project involving production of equipment for making briquettes (ITAR TASS, January 3, 1999).

Despite the claims of yard authorities that “we can do anything,” the most successful civilian projects initiated thus far have been those requiring the least technological adaption. In particular, it has been difficult to make projects economically viable in those cases where they are less technologically demanding than the average defense production project. As an example, the production at Zvezdochka of advanced ship propellers for superliners has been a commercial success. This does not seem to apply

FridQof Nansen Institute 31 to the construction at the same enterprise of hulls for Russian fishing vessels.” In the former case, the technical skills of the workforce is the very quality which makes Zvezdochka’s products competitive. The same quality has almost become a drawback where the latter project is concerned. This illustrates the problem of “technological overkill” that is apt to occur when unnecessarily sophisticated equipment and production modes are applied to the construction of relatively simple items.

In this context, production of offshore equipment was singled out at an early stage as the most promising conversion option for the shipyards. The next section describes efforts by the yards to realize this option through the creation of their “own” offshore company — Rosshelf.

‘The Shelf Will Feed Everybody... ”

The quote above was the headline of an article in which the production of offshore equipment was presented as a universal solution to the problems at the naval shipyards (Fattakhov, 1995). Although the yards did not possess any expertise in this particular field, they were technologically advanced and their engineers were experienced in the field of marine technology.” Therefore, it was argued that they could easily learn to master the new techniques. According to Sevmash representatives, their enterprise actually signed a contract with Sakhalinmorneftegaz as early as 1989 on the delivery of an ice-resistant platform to be used in production of oil from an offshore field to the north of Sakhalin. However, the latter company allegedly abrogated the contract two years later, citing financial difficulties (ibid.). In reality, the shipyards were in no position to compete for such assignments in an open market, since they had no

28The latter project is co-financed by Norway, with the trawlers being equipped at Kwemer Kirnek in . 29According to Yuriy Kondrashov, Assistant Chief Engineer at Sevmash, building the platform to be used in the exploitation of the Prirazlomnoye field is complicated, “but completely withii the capacity of those who for years have been fulfilling analogous tasks when building submarines” (Fattakhov, 1995, p. 13).

Fridtjof Nansen Institute 32 experience in this field, and no investment capital for retooling their facilities. Government backing was necessary if they were to achieve their goals.

Over time, as orders failed to materialize, yard managers apparently determined that they needed to take additional steps to ensure that the yards would be awarded the desired contracts. As stated by the Sevmash’s General Director, David Pashayev, “we understood that we would only receive orders for ice-resistant platforms if we went from being simple contractors to becoming part of an oil company working on the deposits on the shelf. . . . And since there was no such company, we had to create one ourselves (Fattakhov, 1995, p. 11).

The Establishment of Rosshe~

The need to ensure financial support fi-omthe government, and the wish on the part of the defense industry to gain some influence over assignments, was the rationale behind the establishment of the Rosshelf joint-stock company. Academician Yevgeniy Velikhov, son of one of the ‘founders’ of Sevmash, and director of the Kurchatov Institute, — a leading research institution within the Russian nuclear complex — seems to have played the lead role in this process. A letter signed by Velikhov and other prominent figures from the defense industry was sent to Russian President Boris Yel’tsin in late 1991, proposing the creation of “a national share-based company incorporating Russia’s largest defense, oil, and gas enterprises” with a view to development of the resources on the shelf. Velikhov subsequently met with Yel’tsin to discuss the plans, and apparently succeeded in winning the President’s support.

By February 1992, a working group had been formed that embarked on an active promotion campaign for the project, meeting with a range of government and other officials. Responses to the project proposal varied widely. As noted by Velikhov and

Fridtjof Nansen Institute 33 Vyacheslav Kuznetsov30in their book A History of RossheZf, “Radical liberals, who were numerous in the government at that time, did not like to hear about state support of national industry ...The new company was coming into being in a bitter struggle and in a violent clash of opposing interests” (Kuznetsov and Velikhov, 1997, pp. 18-19). Scepticisrrt was particularly strong in the Ministry for Fuel and Energy. However, the proposal was backed unconditionally by the Minister of Industry, Aleksandr Titkin and, not least, by Viktor Chernomyrdin, then chairman of the Management Board of Gazprom, which at that time was a state concern.” In early April, the initiative was approved by governmental decree, and on May 29 Rosshelf was registered in Severodvinsk. It consisted of the military shipyards as well as a handful of defense design bureaus as the main partners. Yevgeniy Velikhov was elected Chairman of the board of directors and President of Rosshelf. Via Rosshelf, the yards attempted to assume the role of offshore operator, and ultimately to obtain licenses for development of the shelf.

At the time, a consortium of Western companies established in 1989 – Arctic Star – in which AMNGR had become a participant, had carried out a feasibility study for Shtokmanovskoye in agreement with the Soviet oil and gas ministry. The companies in this group possessed considerable offshore experience and they were led to understand that the consortium would be given permission to develop the field.32 Rosshelf decided to carry out its own feasibility study for the development of the Shtokmanovskoye and Prirazlomnoye fields, in order to compete for both licenses. Despite the attempts to pass Rosshelf off as an offshore oil company, the idea that the enterprise alone could obtain the licenses was clearly unrealistic. However, arguments regarding the necessity of protecting Russian state interests and the national industry were supported by many government officials, and by striking a deal with Gazprom,

30Kuznetsov was an employee of the Kurchatov Institute and also a member of the working group. 3] Kuznetsov and Velikhov (1997) argue that support from Gazprom was one of three primary factors contributing to the successful establishment of Rosshelf. 32See Moe (1994, p. 135). Arctic Star ultimately consisted of Norsk Hydro, Conoco, and the Finnish companies Imatran Voima, Metra, and Neste, with AMNGR as the Russian partner.

Fridtjof Nansen Institute 34 which was awarded a controlling share in Rosshelf, the latter succeeded in obtaining combined exploration and production licenses valid until 2018 both for Prirazlomnoye and Shtokmanovskoye (Perechen’, 1995). In November 1992, President Yel’tsin signed a decree granting the licences to Rosshelf and instructing the company to work out a long-term program for the development of the Arctic shelf. In December, the “Arctic Star” consortium declared itself dissolved. At the next general meeting of Rosshelf’s stockholders, in June 1993, Gazprom’s Boris Nikitin was elected General Director of Rosshelf.

The efforts of Rosshelf were now directed toward the development of the Shtokmanovskoye and Prirazlomnoye fields. Rosshelf entered into cooperation with the Australian company BHP Petroleum, which, along with Gazprom, financed further exploration activity, as well as some initial reconstruction of the Nerpa, Sevmash, and Zvezdochka yards, where platforms and other equipment were to be constructed. It was decided that one production platform would suffice for the Prirazlomnoye field, and two for Shtokmanovskoye. The construction of the PrirazIomnoye platform began at Sevmash in 1995. The platform is designed by Brown & Root Ltd., which also participated in the feasibility study for Prirazlomnoye, whereas the St. Petersburg Rubin bureau designed the foundation.

A long-term program for the development of the Arctic fields, which was one of the licensing requirements specified in the presidential decree, was prepared in 1994. According to thk program, the Prirazlomnoye and Shtokmanovskoye fields were to be developed in 1998/1999 and 2003-2005, respectively. By 2010, 10 additional oil fields were to be developed in the Pechora Sea. The program envisaged the construction of (among other things) 17 drilling rigs and platforms, 30 other surface and underwater facilities, and a fleet of ice-breaking oil tankers. As the main contractor, the Severodvinsk yards would receive enough orders to stay in operation for decades. Indeed, it was estimated that the number of new jobs in the offshore industry as a whole would reach 140,000 within 8 to 10 years from the beginning of the program’s

Fridtjof Nansen Institute 35 implementation.

Thus far, Rosshelf/Gazprom’s ambitious plans have only been realized to a very limited degree. Out of six new floating units (including the production platform for Prirazlomnoye) that were to be constructed by the year 2000, none has been completed, and in some cases construction has not even started. The construction of the Prirazlomnoye platform was scheduled to take three years, starting in 1995, but in November 1998, Boris Nikitin stated that the Prirazlomnoye platform was only 19 percent complete (Gazprom Surprised, 1998). Plans for the parallell construction of two smaller drilling rigs have also been greatly delayed. The foundation for one of them - the jack-up “Arkticheskaya” - was launched in July 1999, but much work remains to be done on the rig. It is supposed to begin operations in 2001, although “this will only happen if normal financing is provided from the commissioner”

(Severnyy Rabochiy, July 22, 1999, p. 1). No work has been done on the other rig.

The reason cited for these delays is financial constraints. Even prior to the August 1998 events, it had become evident that the economic burden Gazprom had taken on by backing Rosshelf might prove too heavy. Part of the problem may have been that Gazprom had counted on financial support from the state for conversion of the shipyards. In 1996, Boris Yel’tsin had signed a decree (“On the Creation of an Industrial Production Base for the Development of Hydrocarbon Deposits on the Continental Shelf of the Arctic Zone”) that specifically envisaged financing of conversion programs. According to an article printed in Mwyye IZvestiya (August 5, 1998), the edict was annulled surnmarfly after the 1996 presidential elections. Vladimir Vovk, head of Gazprom’s Offshore Projects Administration, was quoted in the article, maintaining that “The government saddled us with problems it should have taken on alone, or at least shared with us”; he further expressed the view that conversion first

and foremost will serve state interests (Pravda Severa, April 6, 1999, p. 3). Lack of money for conversion is not the only problem, however. Rosshelf is reported to be heavily indebted to Brown& Root for planning work already performed, and the latter

Fnd~of Nansen Institute 36 company has temporarily halted work on the Prirazlomnoye platform until they receive payment (ibid.),

Meanwhile, the Severodvinsk yards have increasingly directed their efforts towards the export market. Zvezdochka has been particularly active in this field. The enterprise has entered into an extensive cooperation with Norwegian Kv~rner. Acting as a subcontractor for Kwerner, Zvezdocblcahas delivered parts of two Norwegian production platforms, contracted by Statoil. According to the director for Kvaxner activities in the former Soviet Union, the quality of the constructions delivered by Zvezdochka is “at least as good as what we can produce in Norway” (Tjann, 1999). In order to meet the demands of foreign contractors, Zvezdochka had to use new technologies and construction materials which conformed with specified Western standards (’Zvezdochka’, 1999, p. 57). But we are inclined to believe that any problems of a technical nature will be easier to overcome than those connected with economics and management. Thus it has been argued that the cost of the Prirazlomnoye platform will exceed the cost of ordering the same type of platform from Norway (Novyelzve.stiya, 5 August 1998).

In their public statements, the managers of the naval shipyards have often conveyed the impression that the transition from construction of submarines to that of platforms is a relatively easy one in principle. They have emphasised that the cost of a platform is about the same as that of an average submarine, and that the production capacities and technology required are similar. If, indeed, the $12 million cited above is only a fraction of the funding required to carry out the necessary conversion, such statements appear to be overly optimistic. The experience of co-operation with foreign companies in recent years may to some extent have convinced the yard managers that they must approach the issue of conversion to production of offshore equipment in a more realistic way. Thus, Zvezdochka director Nikolay Kalistratov now says that “One of the key conclusions concerning our strategy for participating in oil and gas projects, is that we must act according to the principle of a step-by-step approach “from simple to complicated” [tasks]...” (’Zvezdochka’, 1999). Such a statement bode well for the future.

Frid~of Nansen Institute 37 LICENSING

Legal framework

Russia has a licensing system for hydrocarbon resources based on the Law on Subsurface Resources (1992), and revised several times later. The system prescribed is not fi.mdamentally different from, say, the Norwegian system, including tenders for exploration and development licenses, payment for the use of underground resources, and provisions for mandatory work on the licensed blocks. The system was general, and intended to apply to all kinds of mineral resources, both on- and offshore. The actual jurisdiction over resources would differ, however, depending on whether the resources were on- or offshore (see below).

In various negotiations between Russian and foreign partners, production-sharing agreements became the favored mode of cooperation. However, the legal basis for such agreements was delayed for a long time in the Russian parliament. Drafl laws went through several “readings” in the Duma and a law was finally adopted and went into force on January 11, 1996.

Production-sharing contracts are most commonly used in developing countries with an insufficient legal flamework for “ordinary” operations by foreign oil companies, and also are used as away to “train” domestic oil companies in countries where production is just starting and there is no experienced oil indusby. Production-sharing agreements (l?SAs) also take the burden of financing exploration and development from the host country. They offer a simple tax regime and provide a way of “getting started.” The basic principles for a PSA are a contract between a (foreign) oil company and the government of the country in question for joint exploration and production in a given area. A national oil company usually represents the government. This company supplies acreage

Fndtjof Nansen Inslitute 38 (production site), whereas the foreign partner supplies capital, technology, or whatever is specified in the agreement. Thus the foreign partner assumes all the direct financial risk. The proceeds fi-om the project are divided between the partners. The actual proportions are established in each contract, but there is usually one proportion until the foreign company has recovered all its costs (e.g., 50/50) and another subsequent rate via which the national oil company gains a larger share (e.g., 30/70) (Jones, 1988, pp. 181- 182).

Clearly two of the general reasons for employing PSAS— an inexperienced oil industry and lack of a legal framework — do not square well with conditions in Russia. The country has a huge and experienced oil industry, which only in exceptional instances perceives any technical need to cooperate with foreign oil companies. Second, the country is already developing a regular licensing system, and emphasis on PSAS could be regarded as a step in the wrong direction. There is little disagreement regarding the third reason for PSAS, however — the need to attract investment resources. The main idea here is to establish a stable and predictable framework for investors by giving the agreement a very strong legal basis and protection. It is precisely this fimdarnental issue that has caused most controversy in Russia. The law included provisions that would give one side the possibility of changing the provisions of the agreement as a result of changing circumstances.33Precisely what kind of circumstances were not spelled out, but some members of the Duma indicated that, for example, a marked increase in the world market price for oil could justify changes in the PSA. This uncertainty was a major concern for foreign partners.

Another clause was that only fields designated by the Duma could be developed as PSAS. Only in May 1997 was the first such list approved by the Duma. The list did not include all the fields where initial negotiations for PSAShad taken place.34Thus the PSA law did not remove all uncertainties and, consequently, obstacles to foreign participation. The lack of political consensus regarding the development of the oil sector in general and the

33For an analysis of the law, see Makhlina (1996). 34In a number of cases, preliminary agreements between Russian and foreign companies had been signed in

Fridtjof Nansen Institute 39 role of foreign capital and companies in particular still was manifest.

With regard to offshore development, the reasoning behind PSA seemed to fit well. The enormous financing requirements as well as the inexperience of the Russian industry in this sector would seem to make PSAS very interesting from the Russian point of view. Nevertheless offshore projects were not automatically placed on the PSA list, although the Prirazlomnoye project was on the first list. Outside investors could take some hope, however, from the fact that a license granted according to the Law on Subsurface Resources may at a later point be converted to a PSA.

Licensing in the Barents Sea

The first exploration and production licenses in the Barents Sea were issued in 1992, for Shtokmanovskoye and Prirazlomnoye, as noted above. These licenses were not awarded according to the formulae above, but as administrative decisions, without any open tenders, counter to the provisions in the new legislation. However, since 1993 there has been talk of opening the Barents Sea for regular tenders for exploration and development licenses. These plans, however, ftiled to materialize or were postponed. In the meantime severeal licenses for geological exploration were awarded to Arktikmorneilegazrazvedka in 1993 and Gazprom in 1995 in the same manner. Later the Finnish-Russian joint venture Pechormomeft was awarded exploration licenses for two blocks. These exploration licenses gave no guarantees of preferential treatment if development licenses were later awarded. But holders of exploration licenses would of course be in a better position to evaluate the prospects of the respective blocks when deciding if they would apply for a development license. Nevertheless, the exploration licenses cannot be seen to have been very attractive.

A “Concept for Development of Hydrocarbon Resources in the Barents Sea Province” was adopted by the Russian government as early as 1995. But only in 1998 did the Ministry of Fuel and Energy and the Ministry of Natural Resources publish a new and anticipation that the project in question would be accepted as a PSA.

Fri&jof Nansen Institute 40 more detailed development program for the period 1998-2005, which included open tenders (Garipov, 1998).35The pkm had been developed in consultation with all affected authorities, including the military. The announcement of the program provided grounds for believing that Russian authorities were now committed to increased foreign involvement. The plan envisioned the participation of several companies, including foreign ones, in tenders for development and exploration rights in the Barents and Pechora Seas as the main principle for development. However, some areas where “special state interests, of a geological-economic or other nature” were concerned, would be subject to closed bidding rounds, where only Russian companies would be allowed to participate. In clear language this would mean that the most promising structures and fields as well as fields in areas considered of special military interest would be off-limits to foreigners.

The program envisions the organization of four open licensing rounds between 1997 and 2005, including the following blocks (uclmstfi): F’imt round (1997-1998): Khodovarikhinskiy, Pomorskiy, Kolokohnorskiy, Murmanskoye, and Kolskoye; Second round (1999-2000): Russkiy and Ledovoye; i%irdround (2001–2002): Papaninskiy and

Tulomskiy; and Fourth round (2003–2005): Mezhdusharskiy and Akhmatovsko- Andreyevskiy. Closed tenders would include fields that could be developed together with Pnrazlonmoye to secure the more profitable development of this large field. These would include such structures as Varandey-Medynskiy, Yuzhno-Dolginskiy, Severo-Dolginskiy, Alekseyevskiy, and Severo-Gulyayevskiy, the most promising in the Pechora Sea at present.

The start of the licensing rounds was delayed, and the first tender was announced only in November 1998, with the details for participation published in February 1999 (Resolution, 1999). The scope of the tender was much smaller than originally planned. The most attractive blocks — Medinskoye More and Varandey More — were reserved for Russian companies, whereas two smaller and less interesting blocks — Pomorskiy

35 A “Concept for Development of Hydrocarbon Resources in the Barents Sea Province” was adopted by the Russian government as far back as 1995.

Fridtjof Nansen Institute 41 and Kolokolmorskiy — were open to foreign companies.

The organization of the tender was, surprisingly, left to Yuzhmorgeologiya, a geological organization based in Gelendzhik in Krasnodar on the . And according to a joint decision by the Ministries of Fuel and Energy and Natural Resources, all organizations carrying out exploration activities offshore would be required to turn over all data and information, old and new, to a new federal organization, Rosmorgeotio (also based in Gelendzhik), or otherwise risk losing their operating license (Bezmatemykh, 1999). 3’ Thus, copies of the geological information hitherto stored in Murmansk was to be transfened to Gelendzhik.

The scope and set-up of the tender generated considerable criticism in Murmansk. The Governor of Murmansk Oblast, Yuriy Yevdokimov launched a harsh public attack on the Ministry of Natural Resources as well as on the Ministry of Fuel and Energy for compromising the interests of the region and not consulting with regional authorities. He was enraged that two fields high on the priority list for Murmansk, Murmanskoye and Kolskaya, had been excluded, as well as by the fact that the tender was to take place in Gelendzhik. If the “errors” were not corrected, he threatened to develop Murmanskoye and Kolskaya without consulting the federal authorities (Yevdokimov, 1998).

Through these decisions, the content of the tender as well as the transfer of the geological data to Gelendzhik, the looming conflict between the federal authorities, in particular the Ministry of Natural Resources, and Murmansk Oblast, caused by years of impatience, came to the surface. One may question which decision was most Iiustrating for oblast oi%cials, the exclusion of Murmanskoye and Kolskaya or their exclusion fi-omthe tender process. Murmanskoye had been mentioned as a possible regional supply source as early as 1987, but dropped from public attention after the discovery of Shtokmanovskoye. The

3’In 1998 “The Russian Information-Analytical Center for Research and Development of the Continental Shelf, the World Ocean, and the Special Economic Zone” Rosmorgeoinfo was established in Gelendzhik. It consisted in part of Soyuzmorgeo, which had been an ail-Union geological organization for the entire continental shelf based in Murmansk, but which was transferred as a very much smaller organization to Gelendzhik in 1998. Both organizations became part of the Geological Organization of the Southern Continental Shelf – Yuzhmorgeologiya (Malovitskiy, 1999).

Fridtjof Nansen Institute 42 reason reflected not only scale differences, but also the fact that the Murmanskoye deposit turned out to have a very complicated geology. According to a centrally placed participant in the exploration process, the field has absolutely no commercial prospects — the cost of extracting relatively small volumes would be prohibitive (Ostisty, 1999). The Kolskaya block is so little explored that the presence of hydrocarbons is very uncerta~ representing a single “spot” in a long geological range. Thus placing these two blocks on the tender list would not have looked good and would have attracted neither Russian nor foreign oil companies (ibid.)

Results of the First Tender

Even though several companies were rumored to be interested, only one company placed bids, the Murmansk drilling organization Arktikrnomeftegazrazvedka (ITAR-TASS, July 20, 1999). This was clearly disappointing for the organizers, but not totally unexpected. The most surprising “no-show” was Gazprom/Rosshelf, which declared that it would not bid in tenders for rights to hydrocarbon sections of the Barents Sea that it already had invested in developing (Gazprom Not, 1999).37Gazprom/Rosshelf demanded to be included in the license or compensated. As mentioned earlier and as reflected in Table 1, Gazprom has been carrying out some activity on Varandey-More as well as Medinskoye-More based on exploration licenses .38 By March, 2000, however, Gazprom/Rosshelf withdrew their claim, something that would permit the results of the fwst licensing round to be finalised.

Arktikmomeftegazrazvedka clearly has the support of the regional authorities in Murmansk in their effort to increase activity on the continental shelf. However, the organization does not have the financial strength required. It is therefore expected that

37 According to Boris Niki@ general director of Rosshelf and member of Gazprom’s management board, Gazprom has spent about $90 million in drilling in the Prirazlomoye area (Gazprom Surprised, 1998). 38The Finnish-Russian joint venture Pechormomeft in fact had exploration licenses for both blocks that were included in the open tender - Kolokolomorskiy and Pomorskiy. on the basis of seismic shot in 1997-1998 and re-analysis of data, they decided not to apply for a development license, but one of the partners — AMNGR — decided to go it rdone.

Fridtjof Nansen Institute 43 it will seek foreign partners. Although foreign companies did not express an interest in the fields during the first licensing round, they may well consider a joint project with AMNGR. However, they will probably not risk a conflict with Gazprom, and any dispute over rights must be resolved first. Second, as with other major projects in the oil sector, foreign companies probably will demand that the project be organised as a production- sharing agreement. AMNGR expects that the government will recommend that the fields be included on the PSA list. However, a decision of the Russian parliament is required for this actually to occur, and that process is relatively unpredictable. We would expect the pressure exerted by Murmansk Oblast authorities to be a crucial fwtor in this process.

Outlook

It is expected that the the second licensing round will be announced in the spring of 2000. For the regional authorities it now seems better to support some exploration activity on the tracts that will come up for tender in later rounds, thus increasing the information base on the structures, reducing the risk, and making the tenders attractive for a wider range of companies. The requisite will exists; the crucial problem is financial resources. It is suggested that, at a minimum, it would take two more years of seismic exploration (on the order of $500,000) of the structures along the Kola coast to select suitable structures for drilling. Exploration drilling would require another two years. Then if positive finds were made, production could start some seven to eight years from now (Ostisty, 1999). Two licenses for geological studies (geologicheskoe izuchenie) in these structures were put up for tender in February, 2000.

But to evaluate the possible pace of development, it is not sufficient to look at the licensing program, we must also return to the interests of the involved parties.

OVERALL DEMAND PICTURE

In addition to such factors as the geology of offshore structures, the availability of

FridQof Nansen Institute 44 financing, regional politics, and the capabilities of Rosshelf to independently explore and produce offshore hydrocarbons, an essential component in any decisions regarding the development of offshore mineral resources in the Russian Barents sea is domestic and world demand for oil and gas. The situation, in fact, can be quite different for oil and gas, respectively. In the oil market, the supply side consists of many relatively small producers, with the development of one additional source not affecting the price in the market in any substantial way. In this environment, in principle, each project is considered on its own merits. There maybe political constraints but there is no strong, co-ordinated national policy with regard to development of oil fields. Russian oil companies that for all intents and purposes are private and guided by commercial and strategic considerations on a company level now make the real decisions.

Gas is very different. The gas market is characterized by a demand constraint, at least in the short to mid-term. Furthermore, the actors on the supply side are relatively few and each actor has the power to influence price. Thus a rapid increase in supplies from one producer without an increase in demand will lead to lower prices. Indeed, it may even be difficult to dispose of the gas physically. Organization of production in the major gas exporting countries varies, but in all the countries there is some form of co-ordination to prevent oversupply.” In Russia the gas industry is totally dominated by Gazprom, which represents a continuation of the old structure of the Gas Ministry, but which also has become the strongest company in Russia today. It is not a formal monopoly, but in reality it has full control of production, transmission, and exports of natural gas.40

Thus Gazprom is in a position to take a comprehensive view of development of gas resources and possibilities on the domestic as well as export markets. For this company, gas fields in the Barents Sea are options that will have to be compared to others. In the company’s public statements, the Barents Sea shelf appears to enjoy a relatively high

39For an analysis of structural developments in the gas market and the organization of gas exports see Estrada et al. (1995). w For an analysis of Gazprom’s development and internal structure see Kryukov and Moe (1996). Recently, substantial assets in the gas industry and also some supply fimctiom as well as export operations (to other former Soviet republics) have been transferred to other companies. However, these companies appear to be largely controlled by or work very closely with Gazprom (see Kryukov and Moe, 1999).

Fridtjof Nansen Institute 45 priority. It is considered a “main strategic reserve for the Russian gas industry in the near fiture” (Nikitin et al., 1999a). The official goal is to start development of the field by 2007 (Belousov, 2000, p. 3) and have gas production started in 2010 (Russia’s Gazprom Outlines, 1998). Still, it maybe questioned whether this is the real priority, or whether Barents shelf development will be postponed in light of alternative supply options and developments in demand for gas.

And Russian gas reserves are enormous. Total Russian reserves are usually stated to be on the order of 48 trillion cubic metres (TCM),4]which constitutes approximately 34 percent of global reserves. The numbers make it clear that reserves in themselves will not be a constraint for either domestic consumption or exports. But the location and structure of the reserves are important determinants for the development of costs in the industry and hence for the possibility of profitable development.

Russia’s proven reserves are quite concentrated spatially: 81 percent are found in West Siberkq another 14 percent are in European Russi~ and 5 percent are in East and the . The role of large fields is another striking characteristic. About 75 percent of the reserves are located in 20 giant fields with more than 500 billion cubic meters (bcm) each (Basniyev et al., 1993).

41 The Russian, or rather Soviet, classification system differs from those used in the West. The Russian “reserve” category A+B+C1 includes drilled, undeveloped, and indicated reserves. The sources quoted in this text are usually very vague about what categories they employ. But one should be aware that the western term “proven” is stricter than A+B+C 1, which are nonetheless ofien equated with “proven.” Generally, Russian and Soviet reserve estimates are considered to be exaggerated by Western specialists. Traditionally, the Soviet reserve system only took geological and technical parameters into consideration and neglected commercial factors. The unit of measure is also an issue. Billion cubic meters (BCM) are used as the standard unit for gas in this text. But this is not the same as a BCM elsewhere. Russian gas is measured at 20”C and one atmosphere of pressure, and so one Russian cubic meter corresponds to 0.93 standard cubic meter of Norwegian gas.

Fridtjof Nansen Institute 46 Figure 2

Russian gas output by producing organisation 1985-98 (BCM)

■ OJsidewest.~b~ri~ ❑ Urengoygazprom ❑ Nadymgazprom ❑Yamburggazdobycha 1-.-.-1❑ Other West-Siberia

1SS5 19S6 1SS7 19S8 1989 1990 1SS1 1992 1993 1S94 1S95 1996 1S97 19S8

Sources: Post-Soviet Geography, various issues; InfoTEK

When it comes to production, the geographical as well as field concentration is even higher. Two fields, Urengoy and Yamburg in the Nadym-Pur-Taz area of the Yamal- Nenets Autonomous Okrug (Tyumen’ Oblast), represent about 70 percent of Russian gas production (e.g., see Fig. 2). The third largest field, Medvezh’ye also is located there. There is no doubt that West Siberia will continue to be the mainstay of Russian gas production. Even if Urengoy’s production is now fidling and Yamburg is levelling out, Gazprom considers it possible to increase production from the Nadym-Pur-Taz area by some 130 to 140 BCM. Economically such a strategy seems quite rational, since development of new production capacity here can utilize existing infrastructure to a considerable extent.

There also are sizeable virgin onshore fields that could be developed, such as several huge gas fields on the , discovered in the 1970s. For a long time, the official policy was that development of these fields would commence as soon as

Fridtjof Nansen Institute 47 construction on Yamburg was completed and that the first gas from Yamal would be produced in 1991. Altogethe; the three largest fields on the Yamal Peninsula could produce as much as 170 BCM per year if they were filly developed simultaneously. The start-up has since been postponed several times and the latest official statement is that production from the largest field on Yamal (Bovanenko) will start in 2010 (Gazprom Alllll,ld Report, 1998).

There are several good reasons for the delay, including changed development strategy, environmental concerns, and general economic recession (reducing gas demand), as well as programs to increase energy efficiency, which have led to far less ambitious estimates of fbture gas demand. According to the latest forecasts (Gazprom Annual Report, 1998), domestic consumption is expected to increase again toward the end of this decade and reach some 370 BCM by 2010 — i.e., only some 45 BCM above the 1998 level.

This is a modest growth compared with estimates from some years ago, but it would still require that some basic problems in the Russian economy in general, and in the gas sector in particular, are solved. The non-payment crisis in the Russian economy has hit the gas industry hard; in the last few years only roughly 20 percent of domestic deliveries have been paid for in cash. The remainder consists of various barter arrangements and transfer of property, or the gas is simply not paid for at all. This situation makes it exceedingly difficult to finance fiu-therdevelopment of the industry. The income from exports has been vital to sustaining the industry in recent years, and it seems likely that Gazprom will attempt to induce various savings in domestic gas consurnption,42where gas is still being squandered due to low payment discipline and low prices.

The prospects for re-introduction of gas from Central-, especially Turkmenistan, on a large scale is an option that is being increasingly discussed. As late as 1990, some 70 BCM were transported from Turkmenistan to Russia, although this had dropped by 1998

42One such measure is the Gazprom-inspired effort to induce Russia’s electric power plants to use less natural gas and more coal, thereby alleviating ostensible “shortages” and freeing greater quantities for export (see PlanEcon Energy Report, Vol. IX, No. 4, January 2000, pp. 1-4; VreinyaMN, December 17, 1999, p. 1 in Current Digest of the Post-Soviet Press [CDPSP], January 19,2000, p. 10) — Ed., PSGE

Frid~of Nansen Institute 48 to only 2.3 BCM. The costs of obtaining this gas would be much lower than in new fields in the Arctic.43

With regard to export volumes, the outlook is quite good. However, even an increase in exports of 50 percent over the next 20 years might not increase demand sufficiently to warrant offshore production in the Barents Sea, because of offsetting gains in energy eftlciency in the economy and/or expansion of onshore production.

Figure 3

Use of Russian Gas (BCM)

—

600- —

500-

400-

❑ 300 - EXpOI-tS-FuSSR ❑ Exp@##est

■ Domestic consumption ❑ lm fls-FussR 200 L3

100 -

1991 %992 1993 %994 1995 1996 1997 1996

-100-

-200 J J

Source: PlanEcon Energy Report, various issues

43OnDecember 17, 1999, Gazprom CEO Rem Vyakhirev and Turkmenistan’s President Saparrnurad Niyazov signed an agreement whereby 20 BCM of Turkrnen gas will be delivered to Russia in the year 2000 at a price of $36.00 per thousand cubic meters (Yremya MN, December 20, 1999, p. 5; see also CDPSP, January 19,2000, pp. 10-11)-Ed., PSGE.

Fridtjof Nansen Institute 49 Although it is clearly beyond the scope of this paper to assess all the dimensions of gas production, consumption, and exports that have a bearing on the problem, it is clear that the development of offshore gas fields in the Barents Sea is not necessary to ensure adequate gas supplies for Russia as a whole, at least not within the foreseeable future. Therefore, we must consider whether Barents sea gas deposits have any special market characteristics that might make their development advantageous at a regional scale, despite abundant supplies at the national level.

OTHER CONSIDERATIONS

As discussed earlier in this report, from a regional perspective increasing the supply of natural gas through development of Barents Sea deposits would be desirable. However it is quite clear that the increased volume of regional consumption would not justi~ development of a giant field like Shtokmanovskoye, even if deliveries were paid in fill. Development therefore will be dependent on export outlook. The location of the source would suggest the construction of a new transport corridor (e.g., through Finland and the Baltic Sea or Sweden to continental ). Such a new corridor would provide a certain diversification in the market, in the sense that the market would be less dependent on the other two main channels for Russian gas — via -Slovakia and Belarus- Poland, respectively. However, a third pipeline corridor also is conceivable even without gas from the Barents Sea. It could merely be an extension of the Northern Lights network that brings gas from Siberia to the St. Petersburg region.a

Gas from the Barents Sea would represent a diversification, a reduction of the heavy reliance on West Siberian gas sources. But would the market be prepared to buy substantially larger volumes of Russian gas than what would otherwise have happened? It is not possible to answer such a question with much certainty. But it seems reasonable

44 Fortum (Neste) and Gazprom have established a 50/50 joint venture – North Transgas Oy - to develop plans for a pipeline via the Baltic Seato Germany. In connection with a feasibility study of the project, Gazprom’s Boris Nikitin explicitly stated that the pipeline could either be a branch of the Yamal- pipeline or could supply gas from Shtokmanovskoye (Feasibility, 1998). In a recent Gazprom presentation (Eksportnaya, 1999), the project is mentioned without any reference to the Barents Sea.

Fridtjof Nansen Institute 50 to believe that the market might be favorably disposed toward a source separate from West Siberia. We do not possess any comparative cost estimates for the Yamal fields and the Barents Se%but we would expect a project in the Barents Sea to be more costly than onshore, even though the latter probably will include an undersea pipeline (under Baydaratskaya Bay) and a longer total pipeline distance. Thus it is highly uncertain whether the “diversification value” will offset increased development costs.

However, three other circumstances must be taken into consideration. Gazprom has clearly understood that it cannot develop a field like Shtokmanovskoye on its own. It lacks the technology, experience, as well as requisite financial resources. In the ongoing preparatory work Gazprom has included several other companies — Norsk Hydro, Neste/Fortum, Conoco, and Total. The work carried out by this group includes market evaluations, improvement of the geological da~ as well as technical solutions. Thus far the status of the group is informal, but the foreign companies clearly expect to become formal partners when the field is being developed, and Gazprom is signaling that it wants to develop the field in partnership with others (Semenyaka, 1999). Several of the companies also have interests as potential gas purchasers. This may mean that market access for Shtokmanovskoye gas could be better than for other Russian gas.’s In any event, the development of Shtokmanovskoye without a long-term commitment from the demand side for this particular gas is unthinkable.

The possibility of establishing an LNG plant on the Murmansk coast adds to the attractiveness of the project. This could provide access to markets beyond the reach of pipelines — for example, the United States. However, the difilculties in establishing a profitable LNG project in the region already have been demonstrated by the Norwegian Snow White project off the coast of . The most certain element of the Shtokmanovskoye project in market terms is the export of condensate, which is in high demand in international markets, and would enhance the overall economic return from the field.

45But the possibility of joint development (with Western partners) of other Russian gas fields should not be ruled out.

Fridtjof Nansen Institute 51 As is clear from the preceding discussion, it is exceedingly difficult to quanti~ the arguments for and against Shtokmanovskoye. But it does not seem that there are sufficiently strong reasons or prerequisites for pushing development now. Nonetheless, for Gazprom as well as the foreign companies involved, Shtokmanovskoye and the adjscent fields are an option that will materialize one day. As such, they merit attention and the use of some resources for improvement of the development plan. But such preparatory work must not be confused with a real start-up.

CONCLUSIONS

Russia does not have a national plan for development of its energy resources. What it has is an “Energy Strategy” with forecasts of demand and assessments of the possibility of covering that demand by various energy sources under different scenarios. The present strategy was adopted in 1995 and covers the period until 2010. However, the strategy is far from an operational plan; it rather is more an attempt at forecasting developments. Detailed assessments of both driving forces and constraints to the development of particular regions and fields must be undertaken on a region-by-region basis, as there is no integrated policy addressing these issues at the national level.

A recurrent theme in this report has been the role of the regions. The regional authorities are a power in and of themselves, but they also work at the national level, where regional considerations, especially in the form of economic development and employment, are a concern. But the regions of interest in this paper — Murmansk and Arkhangel’sk oblasts and the Nenets Autonomous Okrug — do not have uniform interests and priorities, which probably weakens their influence in with respect to this issue.

In recent years, the policy of the federal Russian authorities has primarily acted as a constraint on the development of the Arctic shelf. In a nutshell, their attitude seems to be that it is in Russia’s long-term interest to minimize foreign involvement in the process, even if this means that it will take longer until the benefits can be harvested. Meanwhile,

Fndtjof Nansen Institute 52 efforts can be concentrated on exploiting more readily accessible onshore resources.

It is reasonable to assume that decision makers in the regions bordering on the Barents Sea have a different view, considering the benefits that would accrue to the regions from increased activity on the shelf. However, changes in the political climate toward greater protectionism can be observed here as well. Moreover, the argument that it is better to wait in order to harvest more at a future stage may carry some weight in the regions — at least in certain specific cases.

We believe that the regional authorities in Murmansk Oblast would like to see an increase in activity on the shelf as soon as possible. Development of the Shtokmanovskoye field is probably a top priority, since all spin-off effects from this project would benefit the Murmansk region exclusively, and since this is perceived as important for increasing the supply of gas to the region. We also believe that the region is highly interested in development of the Prirazlomnoye field, since Murmansk appears to be the most likely location for bases, as well as for a reloading port. To the extent that foreign partners are needed to ensure rapid development, we assume that the regional authorities wiIl welcome their involvement. Ideally, the partnership would be with one or several of the regional offshore organizations, but it would not be in the region’s interest to hamper development by other operators. The regional reactions to the exclusion of Murmanskoye and Kolskaya from the recent tender show that there is a strong wish to develop deposits in zones of ‘joint execution’.

The position of Arkhangel’sk Oblast is less clear. It appears that development of the shelf is viewed as important in this region as well, but Russian leadership in the process may be considered more of a priority here than in Murmansk. The presence of onshore resources in the region can make it acceptable to proceed more slowly on the shelf. From Arkangel’sk point of view it is paramount that Rosshelf is allowed to retain a leading role in the project. In general, it may be in the interest of Arkhangel’sk Oblast for foreign companies to play a lesser role in the development of the shelf, if Russian control over projects implies more contracts for the naval shipyards. With respect to development of the Shtokmanovskoye field, Rosshelf7Gazprom have announced their intentions to build

Fridtjof Nansen Institute 53 the platform in Severodvinsk, and a heavy involvement of foreign companies might prove detrimental to these plans. All in all, Arkhangel’sk Oblast seems to have less to lose and more to gain by a wait-and-see strategy than does Murmansk Oblast.

In the current situation, it seems clear that the naval shipyards constitute a constraint to development on the shelf. It has been concluded that both the Prirazlomnoye and the Shtokmanovskoye fields can be developed with existing technology, and it goes without saying that the process could have proceeded more rapidly if experienced contractors had been hired to deliver the necessary supplies and equipment. Conversion of the yards has proved both time consuming and costly. Even more importantly, the foreign companies that necessarily must be involved in development for this process to gain momentum under the current circumstances would probably have been more interested in participating if contracts for equipment could have been awarded on a competitive basis.

This does not mean that the yards cannot, in the future, be turned into an asset in the development process. Some of the fields on the Arctic shelf cannot be developed with today’s technology, and the possibility cannot be excluded that defense enterprises and design bureaus specializing in marine technology will be able at least to contribute to new technological solutions that can make development feasible.

Interestingly, even if Gazprom in many ways controls Rosshelfi the gas giant has chosen also to establish its own subsidiary – Gazflot – as a ‘contracting department’ for offshore rigs and vessels (Paliy, Lakhov and Loboda, 1999, p. 4-5). This gives Gazprom more flexibility in chosing development schemes than Rosshelf alone can provide. At present, Gazflot has one drilling ship in operation – ‘Gazprom 1‘ – and the Arkticheskaya platform under construction in Severodvinsk will also belong to this division of Gazprom

(ibid p. 4).

The role of the military is not quite clear. No one seems to doubt that the Northern Fleet has a strong say in offshore developments in the Russian Barents Sea, and it has traditionally been seen as quite negatively inclined toward almost any development. But with the establishment of the development plan for the Barents Sea, the military has

FridIjof Nansen Institute 54 appeared to accept fairly extensive development. Still the power to impose restrictions on particular licenses probably remains.

However, the possibility exists that the military may have changed its position in a substantive way. Whereas previously the military could detach itself from the regional economy, it is now more closely integrated into that economy.4GThe prevailing economic crisis also affects the military, and developments that would improve the economic situation would benefit the military as well. In Murmansk Oblast, the governor has worked hard to secure support on the national level as well as born other regions for improving the financing of the Northern Fleet. He should expect some reciprocity in the form of the military not obstructing his efforts to improve economic conditions in the region through oil and gas development. In addition, the argument of regional authorities that offshore development will increase regional energy supplies is also one that is expected to go over well with military officials, as the armed forces in the region have experienced serious energy shortages.

It is widely believed that there has been a conflict within the Russian administration over offshore tenders. The Ministry of Fuel and Energy has supported open tenders and also the inclusion of more attractive fields to increase interest in development. Gazprom has been the main force against such developments. It is likely that the company management viewed the alliance with Rosshelf as a way to extend its gas monopoly to the shelf, correctly assuming that Moscow would welcome an actor promising to solve the social and economic problems prevailing in the regional define complex. Gazprom wants to retain its leading position in the development of offshore resources, not only gas but also oil (e.g., RussianPetroleum Investor, February 1999, p. 42).

But the company has many options and can afford to postpone extensive offshore development until it is in a better position to benefit from such development. But although the position of Gazprom is quite clear, it must be questioned whether the

46 For a thorough analysis of the relationship between the military and civilian sector on the Kola peninsula see Homeland and Jargensen(1999b).

Fridtjof Nansen Institute 55 influence of this giant is strong enough to oppose developments so clearly in the nation’s economic interest in the longer run.

According to Minister of Natural Resources V. P. Orlov, “the speed of work to conquer the hydrocarbon resources in the Barents Sea does not correspond to the economic requirements of Russia and the real production capacities in the region” (Orlov, 1998, p. 4). Despite the interest of the three involved Russian regions in increased activity on the shelf, it seems likely that development of offshore hydrocarbons in the Barents Sea will be postponed, at least over the near term. This clearly demonstrates the power of the opponents of such development at present. Over the longer term, the outlook for development in the Barents and Pechora seas will be shaped mainly by changes in the strength of the various forces described in this paper. Among these forces, the three regions have become more important and likely will continue to grow in importance. If the regions are able to formulate and present a coordinated vision of offshore development, then their prospective influence on central decision makers will be enhanced.

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Fndtjof Nansen Institute 62